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Why A Large Round Might Be A Mistake

If you’re a start-up looking to raise money – especially for an Alpha or opening round – 2015 is a great time to be in business. The American economy is growing, Wall Street is flush and Venture Capitalists are throwing money at start-ups, hoping to find the next Uber or Buzzfeed. But the availability of relatively easy VC money also brings its own problems. They are ones that company founders often don’t consider until they’re well into the spiraling expectations that come with taking money from investors. Facebook founder Mark Zuckerberg once said that the hardest thing to learn about being a start-up is that there are a near infinite number of mistakes you can make along the way. And many of those mistakes revolve around VC money and the pressures that come with that “easy” money.

Larger Investments Mean Higher Expectations

A large opening round of VC financing can be liberating. You’ve got the money to build out your start-up the way you want without worrying about paying the electric bill or having the money to hire that talented engineer. But a larger VC deal also means that your window for executing your business plan is much smaller. Gone are the days when a company could close a couple of million dollar early round and spend 12-24 months finding its footing. Larger early financing rounds mean that VC’s will be looking for a viable revenue stream much sooner. They’re not willing to wait 24 months to see if you can build a business model. In 24 months, they’ll be looking for whether or not you’ve built the revenue stream enough for them to start thinking about an exit strategy.

You Only Get One Bite At The Apple

The ironic thing about increased VC financing is that it makes the process of raising later rounds of money much more difficult. There was a time when a company could raise a small Alpha round and then come back to VC’s for a B, C or even D round of financing. That’s still a possibility, but if a company opts for a larger Round A, it will usually only be able to raise additional rounds if it proves there’s a viable business in place. VC’s won’t invest in later rounds based simply on the possibility of an idea. After the first round of financing, they’re looking to invest in a proven business model. And that need to prove proof of concept leads to an increased amount of pressure on everyone in the company.

How Big Is That First Round Of Financing?

One of the key decisions any start-up founder will face is deciding how much money to raise in the first key round of VC financing. It is easier to get money in today’s business environment, and the temptation is to try and raise as much as you can. But the more money you raise, the higher the expectations and that pressure can suffocate a company. On the other hand, not asking for everything you think you’ll need to get to a viable, revenue-positive business could be just as costly a mistake.

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